Brussels (Brussels Morning Newspaper) – Some European central banking and supervisory officials are unsure whether they can still depend on the U.S. Federal Reserve (Fed) to guarantee dollar funding in times of market stress, Reuters reported.
According to Reuters, they are highly unlikely to see the Fed leave its funding backstops unhonoured — and the U.S. central bank hasn’t indicated anything to suggest that.
But then, European officials have discussed this possibility informally since trust in the United States government has been shaken by some of the administration’s policies.
US President Donald Trump has broken with long-standing U.S. policy in a number of areas, such as appearing to support Russia’s position on Ukraine, growing questions about U.S. adherence to European security and setting tariffs on its allies.
What are the concerns about the Fed’s dollar backstops?
In a number of European venues where participants evaluate potential threats to the financial system, these officials have examined scenarios under which the U.S. government might pressure the Fed to discontinue the dollar backstops.
It has been discussed among some officials whether they could find alternatives to the U.S. central bank. During times of market stress, the Fed has provided dollar funding to the European Central Bank and other major counterparts. According to Reuters, there is no good substitute for the Fed, which includes senior ECB and European Union banking supervisory staff with first-hand knowledge of the conversations.
In addition to being an independent institution, the Fed is also responsible to Congress.
Is there a formal plan to reduce reliance on the Fed?
There has never been any suggestion from the central bank that it would not maintain its backstops, designed to protect the U.S. from the impact of foreign economic or financial trauma on the U.S.
Several senior euro zone central bank officials expressed the informal conversations were not influenced by any signs from the Fed or from ECB leadership.
In recent weeks, senior European Central Bank and supervisory staff discussed the matter in working groups that help officials examine issues. There is also likely to be a formal discussion about whether Europe can rely on the Fed’s backstops soon. Christine Lagarde, president of the European Central Bank, said Thursday that the relationship with the Federal Reserve has not changed since Trump took office in January.
